corporate governance presents: measuring corporate culture ... · measuring corporate culture:...

Measuring Corporate Culture:

Enhancing the Board’s Understanding

John C. Lenzi, Chief Compliance Officer, Altria Corporate Services, Altria Group, Inc.

Timothy T. Lupfer, Deloitte Consulting LLP

August 8, 2007

Corporate Governance Presents:

Copyright © 2007 Deloitte Development LLC. All rights reserved.

Agenda

• What is this amorphous thing called ―culture‖?

• The practical value of an ethical culture

• Components and what we should measure

–Programs

–Leadership

–Assessment of ethical climate

• Important findings

• Ethics as a competitive advantage

1


Culture

• Here is a good working definition:

“Culture is the set of enduring and underlying

assumptions and norms that determine how things

are actually done in the organization.”

2


Ethics and Values Define Culture

• The values that drive behavior are the foundation of

any organization‘s culture

• Ethical behavior is actually values in action

• All of these terms, ―values,‖ ―ethics,‖ and ―culture‖

are frequently in the news today

• Why?

3


The Regulatory Environment

• The 2004 amendments to the Federal Sentencing

Guidelines for Organizations

• Placed greater responsibility on Boards and top

management to take active leadership to promote

ethical conduct

• Organizations must now:

–―Promote an organizational culture that encourages

ethical conduct and a commitment to compliance with the

law.‖

4


Polling Question #1

Does your company have an ethics program that

stresses core values and the importance of ethical

behavior in business?

• We have a strong program

• We have some elements of a program

• We have no program

• Don‘t know / not applicable

5


Altria‘s Model of Ethical Culture

Self

Monitoring

Process

Code, Principles,

Policies

Values

Source: Altria Group, Inc.

Corporate

Soul

Rules

Audit

Regime

Ethical

Leadership

6


Why an Ethical Culture Matters

• An ethical culture has significant practical business

aspects:

–Attracts and retains talent

–Protects the enterprise

–Results in better business performance

Let‘s look at each one…

7


1. Attracting Talent

Altria utilizes social

research from DYG, Inc.

indicating post-9/11, all

generations – Boomers,

Gen X, and Gen Y - are

now looking for a

valuable life goal, and

DYG sees the rise of

integrity and ethics as a

differentiator. Recruiting

and retaining talent will

now also be determined

by a company‘s

‗stewardship ethics.‘

Source: Altria Group, Inc. 8


2. Protecting the Enterprise

• From a survey by the Association of Certified Fraud

Examiners:

–Audit activity uncovers 45.5% of cases

• 18.6% Internal audit

• 11.5% External audit

• 15.4% Internal controls

–Not bad, but note…

Source: Association of Certified Fraud Examiners 9


2. Protecting the Enterprise (cont‘d)

• The greatest source to uncover fraud and theft is

individual tips, uncovering 46.2% of total cases:

• 26.3% Employee tips

• 8.6% Customer tips

• 6.2% Anonymous tips

• 5.1% Vendor tips

Source: Association of Certified Fraud Examiners 10


Polling Question #2

What is your company‘s view about the connection

between ethical behavior and business success?

• It intuitively makes sense to us

• A bit of a stretch; it‘s one of many factors in

success, but not a critical one

• Our market competition is dog-eat-dog; ethical

behavior actually inhibits good performance

• Don‘t know / not applicable

11


3. Enhancing Business Performance

Numerous studies in both the US and UK have

shown that companies that make values part of their

business decision-making process have a strong

record in achieving long-term business success.

12


Culture: Getting the Picture

• So, with that background, what should we be doing,

and what should we be measuring?

• There is no single ―magic metric‖ that provides a

complete picture of your ethical culture.

• We must look at a number of different aspects:

–Effective Programs

–Effective Leadership

–Assessment of the current ethical climate

13


1. Effective Programs

• All companies should have these basic activities in

place, with metrics:

– Communication of core ethical values

– Conducting and tracking training (web and live)

– Ability to raise issues, including anonymously

– Tracking, addressing, and resolving issues

– Conducting investigations

– Communicating resolution of issues as appropriate

14


2. Effective Leadership

• Employees take their ―ethical cue‖ from the

observed behavior of their leaders. Does the

organization:

–Make character a part of the hiring process, especially for

senior hires?

– In performance evaluations is the ‗how‘ as important as

the ‗what‘?

–Hold leaders to the same (or higher) standard as

everyone else?

–Punish those who fall short in ethical behavior, in spite of

revenue implications?

15


3. Assessing the Current State

• Altria‘s approach has been ‗what gets measured,

gets done‘

• Measurement includes ‗hard‘ and ‗soft‘ data

• Key issue areas are:

– View of ethical culture

– Senior management support

– View of ‗level-ism‘

– Retaliation

– Pressure to violate policy or the law

– Observing misconduct

– Reporting what you saw



Polling Question #3

Does your company conduct a survey to gauge the

ethical climate of your organization?

• We conduct an extensive survey, analyze the

results, and report the findings

• We conduct a limited approach, with some aspects

of surveying the ethical culture/climate of our

organization

• We don‘t survey this aspect of our organizational

behavior

• Don‘t know / not applicable17


Deloitte-Funded Research Findings

• Does work-life balance influence positive ethical

behaviors at work?

• According to the findings of the ―2007 Deloitte &

Touche USA LLP Ethics & Workplace‖ survey, there

is a strong relationship between the two factors.

• The survey, conducted by Harris Interactive on

behalf of Deloitte & Touche USA, also showed that

the behaviors of management and direct

supervisors, coupled with positive reinforcement for

ethical behavior, are the top factors for promoting

ethical behavior in the workforce.



Altria-Funded Research Findings

• Groundbreaking global research on ethical culture

conducted by the Compliance & Ethics Leadership

Council (CELC) of the Corporate Executive Board

in 2007.

• The research found five leading indicators of

potential misconduct:

–Retaliatory culture and discomfort with speaking up

–Willingness to compromise ethics for power and control

–Direct manager lacks trust and respect for employees

–Relative commitment to one‘s job, manager, and company

–Percentage of variable compensation



Altria-Funded Research Findings (cont‘d)

• CELC found that concern about retaliation was the

single greatest leading indicator by far.

• Almost double the importance of all other factors

combined.

• The research for this study included the US, UK,

Canada, Australia, and India, and the findings

appear to be applicable on a wider, global scale.



Polling Question #4

How confident is your company about embedding ethical accountabilities into your performance expectations?

• Expectations of ethical behavior are identified for all jobs

• Expectations of ethical behavior are identified for critical jobs or specialized functions, but not for general positions

• We really haven‘t given much thought about ethical behavior and expectations for our job positions

• We don‘t think this is relevant to job performance

• Don‘t know / not applicable21


Altria‘s Conclusions

• Workforce demographics are changing

• It‘s a wired, transparent world

• Generational views focused on ‗values‘

• In a very dynamic environment, businesses will

compete hard for the best talent

• Emphasize values and ethics-based corporate

culture

• Recruit and retain with a focus on corporate ethics

• Ethics becomes a competitive advantage


22


Altria‘s Conclusions (cont‘d)

• Building and maintaining a program that simply

‗meets‘ the FSG is not enough

• But to build a strong corporate culture today, the

balance among the phases of an ethics program

must shift:

–Reactive: correcting violations of law or company policy

as they arise

–Proactive: a comprehensive system of policies and

procedures designed to prevent – or detect and correct –

violations of the law or company policy

–Transformational: a proactive program integrated into

business practices and culture

Courtesy of: © 2007 PEAC Ventures, Inc.—Strategic Priority--Compliance & Ethics Solutions LLC23


Reactive Proactive Transformational

CURRENTT

ime S

pen

t

Phase 1 Phase 2 Phase 3

Reactive Proactive Transformational

FUTURE

Tim

e S

pen

t

Phase 1 Phase 2 Phase 3

Courtesy of: © 2007 PEAC Ventures, Inc.—Strategic Priority--Compliance & Ethics Solutions LLC

Future Implications

24


Revisiting the Altria Model

Self

Monitoring

Process

Code, Principles,

Policies

Values


Corporate Soul

Rules

Audit Regime

Ethical Leadership

Culture

25


Conclusion

• Remember the slogan for the Clinton campaign

during the 1992 presidential election?

–―It‘s the economy, stupid!‖

• Today the watchword for organizations is:

–―It‘s the culture, stupid!‖

26

Questions & Answers


Join us September 12th at 2 PM ET

as our Corporate Governance group

presents:

The “G” in Governance, Risk,

and Compliance: What’s the

Board’s Role?


Thank you for joining

today‘s webcast.

To request CPE credit,

click the link below.


Contact Information

• Timothy T. Lupfer

Deloitte Consulting LLP [email protected]

• John C. (―Jack‖) Lenzi

The Altria Group, Inc. [email protected]


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